Insperity, Inc. — Q1 2017 Form 10-Q
Business context and period. Insperity provides HR and business services, primarily through professional employer organization (PEO) solutions. This unaudited report covers the three months ended March 31, 2017, compared with Q1 2016.
Financial performance and position
| Metric | Q1 2017 | Q1 2016 / prior date | Change |
|---|---|---|---|
| Revenue | $882.7 million | $802.4 million | +10.0% |
| Gross profit | $159.3 million | $150.0 million | +6.2% |
| Operating income | $53.5 million | $53.0 million | +0.8% |
| Net income | $35.6 million | $32.7 million | +9.0% |
| Diluted EPS | $1.69 | $1.53 | +10.5% |
| Adjusted EBITDA (non-GAAP) | $62.7 million | $61.2 million | +2.5% |
| Operating cash flow | $43.7 million | $95.2 million | Down $51.5 million |
Gross margin on reported revenue was approximately 18.1%, versus 18.7% a year earlier; operating margin was approximately 6.1%, versus 6.6%. Average monthly worksite employees paid rose 10.1% to 174,354, driving revenue growth. Gross profit per worksite employee per month fell 3.5% to $305, while operating expenses per employee declined 1.0% to $202.
Cash and cash equivalents were $303.9 million at March 31, 2017; cash, cash equivalents and marketable securities totaled $305.7 million. However, $232.4 million related to payroll taxes and other deductions and $10.5 million to client prepayments. The company’s non-GAAP adjusted cash measure, excluding those amounts, was $62.9 million, compared with $44.9 million at December 31, 2016. Working capital was $59.5 million, up from $39.4 million at year-end. Long-term debt was $104.4 million; the $200 million revolving facility had $94.6 million of available borrowing capacity after borrowings and a letter of credit. The company was compliant with debt covenants.
Investing cash outflow was $11.6 million, primarily for construction of a new corporate-campus facility completed in April. Financing cash outflow was $14.3 million, including $9.3 million of share repurchases and $5.3 million of dividends. Cash increased $17.8 million during the quarter.
Changes versus prior period and management commentary
- Revenue growth reflected 10.1% more average worksite employees paid; revenue per employee was essentially flat.
- Gross profit grew more slowly than revenue. Direct costs per worksite employee increased 0.7%, including higher health-benefit costs; workers’ compensation costs declined.
- Operating expenses rose 9.2%, led in part by higher corporate headcount, stock-based compensation and advertising. Expenses per worksite employee decreased.
- The effective tax rate declined to 33.2% from 38.0%. The company recognized a $3.3 million tax benefit from vesting restricted stock awards, versus $1.0 million in Q1 2016.
- Operating cash flow was lower than the prior-year quarter. Management noted that client payment and payroll timing materially affect reported cash flows; the prior-year quarter-end had substantially higher client prepayments and accrued payroll.
Outlook, risks and contingencies
Management said cash on hand, operating cash flows and available revolving-credit capacity should meet liquidity needs for the remainder of 2017. The filing provides no quantified earnings or revenue guidance. Management expects revenue-recognition policies to remain substantially unchanged when the new standard is adopted in 2018; the company was assessing the impact of the new lease standard.
Key risks include health and workers’ compensation claims and costs, insurer contract renewals and solvency, client retention and acquisition, economic and regulatory changes, geographic concentration, competition, payroll and benefits obligations, data security and technology systems, and litigation. Estimates for health and workers’ compensation claims require judgment. Q1 benefits expense included $1.7 million of adverse prior-period claim run-off; workers’ compensation costs included a $3.9 million reduction in estimated prior-period losses.
A 401(k) class-action suit alleges fiduciary breaches and excessive recordkeeping fees. Insperity disputes the allegations and intends to defend the case; no provision was recorded because the outcome is uncertain. Management said other ordinary-course litigation is not expected to materially affect financial position or results. Disclosure controls were assessed as effective at March 31, 2017.
Important facts for investors to verify
- Whether continued worksite-employee growth can offset lower gross profit per employee and pressure on operating margins.
- The sustainability of health and workers’ compensation cost estimates, including the effect of prior-period claim adjustments.
- The composition and availability of cash: reported balances include substantial payroll-related funds and client prepayments.
- Revolver terms, variable-rate exposure, covenant compliance and capacity after borrowings and letters of credit.
- Developments in the 401(k) litigation and any change in the company’s assessment or potential exposure.
- Non-GAAP adjusted cash, adjusted EBITDA and adjusted earnings reconciliations; these measures are not substitutes for GAAP results.